Behind the buzzword: what is Blockchain?

Few of us have escaped that awkward moment when someone mentions the ‘B’ word. You know the one: Blockchain. It seems to be everywhere, discussed and held up as a shining star in the lexicon of new technology.

But what exactly is blockchain and why does it matter? Most people are dimly aware of it, if at all, only in relation to bitcoin digital currency, the ‘virtual money’ we also struggle to grasp.

What they may not appreciate is that blockchain is a revolution in the way transactions of all kinds are processed and validated, allowing companies to make them transparent and instantaneous on a distributed network of computers without needing a central single authority, such as a bank.

This offers many advantages, not least of which is speed. It also ends reliance on a single clearing house to process and record what has taken place. In other words, it cuts out the middleman, with all the delays, foibles and problems that can involve.

Many major financial institutions and quite a few firms are now trialing blockchain technology, which is itself evolving all the time, to speed transactions and cut costs.

Blockchain also reduces fraud, which is an increasingly important issue in the digital age. Think of it as a super-secure social media. Once an encrypted transaction is recorded and distributed, it is very hard for anyone to change or remove the information because the original record is so widely dispersed. Electronic alarm bells would soon be ringing if anyone did.

Another way to think about it is to imagine your initial blockchain transaction as a brick. Every other computer in the network, which can be closed or open, knows straight away what that brick looks like. If anyone wants to add to that brick, or change it, the entire network will look at the proposed new brick and decide whether it resembles the earlier ones and whether to permit the transaction.

So, blockchain ensures that only when the identifying information matches is a new transaction approved. The whole idea is, of course, underpinned by computer speeds and cryptography to keep information secure.

But perhaps the most important point about blockchain is not what it is, but what it might do. We are still in the very early days of its development. Venture capitalists and banks are already quietly looking at applications, particularly around identity management and contracts. It may also help in processing the mountain of information likely to come as the ‘internet of things’ gains momentum with more and more devices gathering and acting on data.

The UK’s Actuary’s Department said this month that it could see a role for blockchain in transforming the administrative systems used in financial services.

Firms currently keep contractual records on a central, and private, database. A system based on blockchain, the actuary’s suggest, would allow more parties to be involved in tracking every step of an activity. They also noted that the technology could speed up and reduce the cost of trading financial securities.

There are issues around privacy and security which will need to be addressed as blockchain grows and applications are found. But these are already being rehearsed through wider data protection requirements, so should be manageable.

Blockchain has an image problem, too, which will need managing. Its reputation is coloured by the impression many have that bitcoin, its main current application, is viewed by regulators, fairly or unfairly, as a way to hide financial transactions from tax authorities or fund illegal activities on the so-called ‘dark web’. There are many recent examples in Northern Ireland and beyond of cyber criminals demanding payments in bitcoin to take advantage of the anonymity such currency gives. However, blockchain's association with bitcoin will no doubt diminish over time and any negative impressions will probably change as new applications are developed.

Belfast is also quickly becoming a specialist hub for blockchain. Rakuten, the Japanese e-commerce company, recently opened its Rakuten Blockchain Lab in Belfast to develop applications in the fintech and e-commerce sectors and PwC has established a dedicated blockchain team in its Belfast Office. So this is an area of expertise that Belfast can build a leading edge on.

But wherever it ends up, the idea of a secure digital ledger recording ownership through a shared platform looks like becoming a permanent fixture in our business lives - whether we understand it or not.

First published in Ambition magazine on 14 November 2016.

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